U.S. COMPANIES : THE FOREIGN CASH CONUNDRUM / THE FINANCIAL TIMES LEX ( RECOMMENDED READING )

Overseas cash piles

Last updated: August 11 2010 19:49

It has been shown convincingly that investors have made too much of the cash on corporate America’s balance sheets by neglecting to consider offsetting debt. On that measure, companies are not particularly flush, but their gross cash levels are still curiously high – the most as a share of their assets in half a century for non-financial firms. But even this figure is misleading because it ignores a large, unstated tax liability.

Corporate America earns and parks much of its cash abroad. Cisco, for example, does not pay dividends but has $40bn of cash overseas that John Chambers, chief executive, says he is in no hurry to repatriate. This is because a big chunk would go straight to the tax man. He estimated that US companies would send up to $750bn home if given a break.

This seems plausible since $360bn returned in 2004-2005 when the rate was temporarily cut from 35 per cent to 5.25 per cent. That episode provided fodder for critics though. It proscribed returning cash to shareholders or enriching executives but, money being fungible, subsequent studies mostly conclude that this is what happened. Repeating the exercise was considered as part of the 2008 stimulus bill but was shot down. The Obama administration instead wants to penalise offshore cash hoarders.

It is true that the expectation of repeated amnesties creates an incentive for hoarding, but critics also ignore the underlying problem: The US corporate tax policy is broken. Marginal rates are the second-highest among developed nations and the US is the only one to tax corporations’ foreign income again. Reform opponents who consider cutting or eliminating corporate taxes as socially unfair wrongly conflate individuals and corporations, ignoring the fact that the excess cash is eventually taxed or invested anyway.

America’s corporate cash hoard yearns to breathe free, and to return home.

Copyright The Financial Times Limited 2010.